The Rise of Counterfeiting and Its Effects on Nike

Introduction

The term “counterfeit” refers to the tangible goods that infringe trademarks, design rights or patents; and “pirated” refers to the tangible goods that infringe copyright (OECD/EUIPO, 2016).

The fake goods market is on the rise. It is estimated that the international trade in counterfeited products amounts to almost a half a trillion dollars (Kim, 2016).

According to a report, "Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact," around 2.5 percent of the total international trade was represented by counterfeit goods in 2013. This figure in monetary terms would be around $461 billion. It also lists the industries that are affected by counterfeiting. The industry with the most counterfeit seizures in 2013 was footwear, followed by clothing (knitted or crocheted) (OECD/EUIPO, 2016).

Industries with the most counterfeit seizures in 2013 (OECD/EUIPO, 2016):

Footwear

Clothing, knitted or crocheted

Articles of leather

Electrical machinery and equipment

Watches

Instruments, optical, medical, etc.

Clothing, non-knitted or crocheted

Perfumes and cosmetics

Toys

Pharmaceuticals

Jewelry

Around 7-8% of world trade every year is in forged goods, according to FBI, Interpol, World Customs Organization and International Chamber of Commerce (Holostik, 2017).

Nike happens to be one of the most counterfeited brands in the world. The report includes that Nike "seems to be more intensely targeted by counterfeiters". It also says, fake Nike shoes are worth between $5 to $200 on the counterfeit market (OECD/EUIPO, 2016).

According to MSN Money, Nike forms a part of the top 10 most counterfeited brands in 2016, based on customs seizures (Lovemoney, 2016). The most counterfeited items are Nike sneakers followed by the clothes with the Nike’s famous Swoosh Logo (Lumb, 2017).

Nike is considered to be the most valuable sports brand in the world (Forbes). It has a market capitalization of $ 96.12 B and generated an annual revenue of $32.4 billion (FY 2016) (Nike, Annual Report).

But today Nike faces the threat of counterfeit goods, which is increasing year after year as suggested by data. It is the most counterfeited brand in the world. This affects the overall image of the brand, and it might dilute the brand equity. Also, the presence of fake Nike merchandise in the market leads to lesser revenue generation for the company, which means lower profits. Not only that, such huge losses affect the economy on the whole. It is estimated that the total loss faced by countries around the world is $600 billion. The United States faces the most economic impact (Holostik, 2017).

The company must take suitable actions to prevent the dilution of such a powerful sports brand. The study hence, deals with the rise of counterfeiting around the world, and how Nike became such a sought after brand in terms of counterfeiting. Like any other crime, counterfeiting requires immediate attention (Holostik, 2017).

The data is gathered from secondary research, which includes data from sources such as online news articles, reports, websites, etc. The time period of data is from the year 2013 to 2017 and includes worldwide data.

Background of Study

Founded in January 1964, as Blue Ribbon Sports (BRS) by a track athlete Philip Knight and his coach Bill Bowerman, the company’s name was changed to Nike in 1973 after the Greek goddess of victory. (Sanusi, Lazarev, Jorgensen, Latsanych, & Badtiev, 2014).

Their famous swoosh logo was created by a design student Carolyn Davidson for $35. The estimated market value of Nike today is about $10.7 billion. (Sanusi, Lazarev, Jorgensen, Latsanych, & Badtiev, 2014).

Nike is known for itsconstant innovation and that has primarily been the reason for Nike's success (Sanusi, Lazarev, Jorgensen, Latsanych, & Badtiev, 2014). It has grown into a world-renowned brand, so much so, that due to its popularity and the customer base, there are bigger chances of counterfeiting.

There can several reasons why counterfeiting exists and is rising. Some reasons can be seen below.

According to a website called Holostik, “the urge and the desire amongst the population to own products from such popular brands is one of the major factors which leads to the creation of duplicates or fakes. The most counterfeited are not the big and luxury labels but brands, which are most widespread and prevalent amongst the consumers.”

Another reason why fakes are being produced is the high demand from consumers for such products. The demand is driven by the need to have a better lifestyle and thus counterfeiting is increasing day by day (Holostik, 2017).

The manufacturer’s point of view is that imitations of famous brands don’t even require much push to be sold. Also, they do not require much money to be fabricated. There is also unawareness amongst the consumers about counterfeiting which also leads to production of fake products in the market (Holostik, 2017).

Moreover, the countries where most of the manufacturing is carried out, there is poor protection of intellectual property which has provided means to make fake products due to availability of both technology and opportunity (Holostik, 2017).

Findings

This section talks about the recent instances of counterfeit seizures that have taken place, that included Nike products, the major markets for production of fake goods, the effect that counterfeit has on Nike and the steps taken by the company to combat the counterfeiting situation.

Counterfeiting and Effects on Nike

According to a news report by BBC, in December 2016, counterfeit goods with an estimated street value of more than £2m were seized in raids in Manchester, which included Nike trainers. (BBC News, 2016).

China is identified as the top manufacturer for fake goods, even though there are other emerging or middle-income countries that produce fake goods. Around 63.2 per cent of customs seizures (2011-2013) were from China (Rodionova, 2016). It can be termed as the ‘counterfeit capital of the world’. It is estimated that the counterfeiting industry accounts for around 8% of China’s GDP (Holostik, 2017). This can also be viewed in Fig. 1.

The second country to follow was Turkey (3 per cent of all counterfeit confiscations) (Rodionova, 2016).

Fig. 1. Production of counterfeit goods in 2013 (OECD)

The following graph shows the top ten counterfeited brands by number of cases in 2013 (World Trademark Review):

Fig. 2. Top 10 Counterfeited Brand 2013 (No. of Cases)

These days fakes items are available online on marketplaces like eBay, Alibaba etc. The problem of tracking becomes even more challenging in such cases because it becomes difficult to identify the physical location of an online vendor. It becomes even more difficult to uncover the details of their operations (Howland, 2015).

According to a group The Counterfeit Report, more than 250 items on the site were fake on eBay in the U.S., which were extremely difficult to track (Howland, 2015). There are other websites that have sold Nike shoes illegally, and some of them have been successfully closed down the website concerned. For example, in 2015, an online retailer Get-Supplied.com was caught trying to sell fake Nike sneakers. The other names to the website were, “Supplied Inc.”,“SuppliedPDX” and “Supplied” (Weisberg & KOIN 6 News staff, 2016).

Footwear brands like Nike outsource manufacturing due to which means that counterfeiting has become difficult to control. The companies that are contracted make near identical products from the designs illegally (Howland, 2015).

Nike falls in the luxury footwear industry. It’s shoes are widely influence by it’s brand appeal and design and not function.

The major reason for growth of counterfeiting is that the shoe industry has grown in recent years. Today, an average consumer can afford to keep up with rapidly changing fashion trends. According to an article, why shoes are the most counterfeited product?, “with the e-commerce boom, a tidal wave of celebrity-endorsed products and increased engagement in fitness activities, shoes of all types are enjoying high market performance. Of course as the genuine footwear market experiences success, counterfeiters respond with a multiplicity of imitation products, rolling fakes out rapidly to keep up with release dates.”

Another issue with counterfeiting, is not only the original products of Nike are copied, but its trademark logo, the swoosh, is printed on just about anything primarily because of the ease of the printing of the logo. These products don’t even have the technology that Nike uses in its products and retail at both cheaper and high prices. This also is a challenge for the company for these products are even more difficult to identify and penalize.

Recently, basketball shoes have become increasingly popular with added hype from the social media platforms. To maintain brand appeal, brands release limited edition merchandise to maintain exclusivity and also because it is impossible to meet demand for products. Due to this, the prices are always high and the products are unavailable due to which consumers often buy counterfeits.

Nike is an example of a company that can lose a lot due to counterfeit products. The reason for this is that there is a narrow difference between the prices of the original and fake products. This is not the case with other brands that make the list (Rolex, Louis Vuitton) because they are luxury brands and there is a huge gap between the prices of the real and the counterfeit product. They might not be as affected as brands like Nike. A report by Business Insider has shown how Nike is losing as much as 10% of the revenue to counterfeit products. Apart from this, the damage its faces to its reputation are also huge.

In China, which accounts for more than 62% of knock-off production, and which is a huge market for Nike, sales are continuously going down due to the prevalence of cheaper fake sneakers and other Nike merchandise. The orders from China, have dropped.

The fake products have somewhere diluted the brand image, as in this ever-evolving industry; consumers have options to switch over to other brands. Although Nike has maintained a strong brand position over the years, but if the trend continues, the customers would not mind shifting to the products offered by Nike’s competitors, because of a large number of fakes available in the market. This is a bigger problem than just the loss of revenues, because since the fashion trends change so rapidly, and there are end number of players in this industry, the consumers may not be that loyal to a brand. Sometimes, the knock-off products are so real that it is extremely difficult to differentiate between the real and the fake, even for experts. So, knowing this, the consumer would not prefer to purchase fake products at almost the similar price of the original product.

Steps By Nike

Nike has recognized that there is a huge market for counterfeit goods. This has led the company to create a forum to report instances of fake products through its US website. It also promotes its consumers to only purchase Nike merchandise from Nike.com, Nike retail stores or authorized Nike retailers.

Also, to protect its brand, Nike actively engages with law enforcement agencies and customs, on a global level to reduce the chances of the fake products reaching the company’s consumers (Rodionova, 2016).

Several counterfeit or knock-off products can be found online. To combat that, Nike tied up with Amazon to cut down on third-party sellers who offer fake products, by directly selling Nike products through Amazon’s Brand Registry program. Through this, Nike can not only directly sell its products through Amazon, but it will reachto the vendors who sell Nike products to prove to Amazon that their products are authentic and are not fake. This comes after even Amazon has recognized that fake products often dilute trust in the marketplace (Lumb, 2017).

Nike owns the world-famous brand Converse and in the recent times has lodged complaints with the International Trade Commission to stop fake ‘All-Stars’ from getting traded (Howland, 2015).

Conclusion

Globally, the counterfeit or the fake products market amounts to about half trillion-dollar industry. This is around 2.5 percent of the total international trade in 2013. World renowned and popular brands like Nike are facing the consequences of the fake products, with their revenues and brand equity taking a hit. Counterfeiting is illegally carried out in countries where the products of the companies are manufactured due to less focus on the intellectual property giving them the opportunity to produce real looking knock-offs easily.

Sometimes the products go undetected, other times there are no stringent rules and regulations to keep a check on these counterfeiters. Nike has already made efforts to try to reduce the existence of fake products, but it has a long way to go before the tag ‘the most counterfeited brand’ in the world in removed from the brand’s name. Today, counterfeiting may prevail everywhere, but with consumer awareness and right counter measures, it can be defeated.

Recommendations

Powerful companies such as Nike can fight the counterfeiting problems in court. For example, luxury brand Kering SA (maker of luxury brands Gucci, Yves Saint Laurent, Bottega Veneta, and Balenciaga) sued Chinese company Alibaba for selling counterfeit items on its marketplace, several times (Howland, 2015).

Companies should start by educating the consumer, by telling them about the prevalence of counterfeiting and the affects it has on the markets. They can use social media platforms, and use their websites to do so and tell them how to spot fakes as well as the importance in avoiding counterfeits. Companies can use some easy solutions such as

tax stamps

holographic boards

3D holographic stickers

paper labels

in their products to differentiate between the authentic and fake products. They must use effective communication strategy to educate these to their consumers also. This makes products easily verifiable and gives them a unique identity.

The company can also opt for some advanced techniques to develop authentication, anti-counterfeiting and anti-tampering solutions to protect their products.

Nike can go for in-house manufacturing to protect their products. The drawback of this solution can be the increased labour costs.

Nike can also join hands with other brands in the market such as Adidas, Puma, etc. to fight counterfeiting together, which may benefit not only Nike but also its competitors. It can also collaborate with the governments of the countries where outsourcing is carried out for production to fight counterfeiting together.

Lumb, D. (2017, June 21). Nike will team up with Amazon to fight fake kicks. Retrieved September 11, 2017, from Engadget: https://www.engadget.com/2017/06/21/nike-will-team-up-with-amazon-to-fight-fake-kicks/

Howland, D. (2015, May 27). Why fake goods are a real problem—and what retailers can do about it. Retrieved September 11, 2017, from Retail Dive: http://www.retaildive.com/news/why-fake-goods-are-a-real-problemand-what-retailers-can-do-about-it/399697/

Holostik. (2017, August 5). Counterfeiting is everywhere – Know the top counterfeited brands. Retrieved September 11, 2017, from Holostik: https://www.holostik.com/blogs/counterfeiting-is-everywhere-know-top-counterfeited-brands/

World Trademark Review. (n.d.). Nike named the most counterfeited brand, but statistics don’t give the full picture. Retrieved September 2011, 2017, from World Trademark Review: http://www.worldtrademarkreview.com/Blog/detail.aspx?g=c085ce3e-8f80-486c-a50f-026f55d39a23

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